After 20 years in the advertising business, I took a $12/hour job at Trader Joes to learn how it built one of Americas most valuable brands, virtually without brand advertising. Thats the story behind my book, "Build a Brand Like Trader Joes" available on Amazon. I am currently a... More

Trader Joe's: Investment Lessons From A Company You'd Love To Invest IN, But Can’T 0 comments

Not long ago, the CEO of Costco, Jim Sinegal, was asked what he looked for in an investment. His reply was not typical: He said that he only owned two stocks himself, Costco's, and Berkshire Hathaway! But when they interviewer pressed him to describe the kind of company he would invest in, he cited Trader Joe's -- a privately-held company. Obviously, he didn't mean he'd invest in Trader Joe's, since that's an impossibility (it's wholly owned by the German-based Berthold family trust.) What he meant was, he'd invest in companies that displayed similar values.

I've also been fascinated by Trader Joe's for a long time. How, for example, did this fast-growing company build one of America's most valuable brands, while doing virtually no brand advertising -- and little advertising of any kind? One thing's for sure, they won't tell you. Trader Joe's is also one of America's most secretive companies. That's why after 20 years in the ad business, I went to work for them for $12/hour before writing, "Build a Brand Like Trader Joe's".

My year on the floor at Trader Joe's taught me a lot about building a great cultural brand, and I think that Costco's Sinegal is right on the money when he says that companies that share Trader Joe's values are also good value investments. (Although Trader Joe's is very tight-lipped about financials, most grocery experts peg annual revenues north of $8 billion, and accepted wisdom is that sales per square foot and profitability are both at the very top of the grocery segment.)

One thing that Sinegal didn't mention was the enormous competitive advantage Trader Joe's has, in that it has built its valuable brand virtually without the huge expenses other companies put forth on advertising and marketing.

Although brand valuation is not a hard science, companies like Millward Brown go to a lot of trouble to put a dollar value on companies' brands. If their numbers are accurate, it's clear that many companies' most valuable asset is intangible -- it's their brand. Take UPS for example: Millward Brown's most recent BrandZ survey pegged UPS as the 16th most-valuable global brand, and said the brand alone was worth $37 billion. To put that in perspective, UPS' most recent annual report cited 'Total Assets' as $34 billion. Yes, the brand -- not counted as an asset for accounting purposes -- is worth more than everything else the company owns.

Since Trader Joe's would never cooperate with Millward Brown, it's not listed in BrandZ. But other market researchers have concluded that in the U.S. markets where Trader Joe's is active (the company currently operates about 375 stores, but is only just now expanding into major markets like Florida and Texas) it's as recognizable and has as positive associations as Nike or Apple! The store's customers have been described -- indeed many of them describe themselves -- as a cult.

So, although brand value doesn't show up on the balance sheet (yet) it's clear that all else being equal, companies with more valuable brands make better long term investments. That's what Jim Sinegal was getting at. And companies that have valuable brands without a huge concomitant advertising and marketing budgets are especially good investments.

It would take an entire book, not just an article, to explain how Trader Joe's built its brand without advertising (that, in fact, is what "Build a Brand Like Trader Joe's" is all about.) But perhaps the single most important take-away for an investor is this: you can build great brands on the strength of marketing strategy and clever advertising, but history shows that those brands are not nearly as strong as brands built on corporate values and culture.

At the end of the day, Trader Joe's built its incredible brand by convincing millions of devoted customers that they have a genuine friend in the grocery business. Wanting to shop at your friend's store is not something that will ever go out of fashion.

That's why if you're a value investor, you should look away from a company's financials and consider brand value -- and look for companies with brands built on company values. You can't invest in Trader Joe's, but I wrote "Build a Brand Like Trader Joe's" because I know the techniques they used to build their cultural brand can be replicated. Follow Jim Sinegal's advice and go out there and look for companies that are building their brands the Trader Joe's way.

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